Gold's gains linked to dropping dollar
Bullion bounces as elections, interest rates take toll
By Thom Calandra, CBS.MarketWatch.com
Last Update: 12:02 PM ET Nov 5, 2002
SAN FRANCISCO (CBS.MW) -- What's wrong with this picture? Gold -- along with the shares of the companies that mine it -- is rising even as the overall stock market stages an autumn rally.
More often than not, gold-related investments fall when the broader market shines because they represent low confidence in the financial system. This time, a sliding dollar is assisting gold in its gains, against the improbable backdrop of rallying U.S. stocks.
In the past five days, the Philadelphia Gold & Silver Index (XAU) has gained 6 percent vs. a 3 percent gain for the Standard & Poor's 500 Index (SPX), which represents the overall market.
Gold's underlying spot price (38099902), meanwhile, has risen 2 percent in the past 10 days, flirting with $320 an ounce. On Tuesday, the euro, resuming a 10-month comeback, was quoted at more than $1, the European currency's first time at that level since late July. See full story.
Gold is nearly always the antithesis of the stock market. In the almost six-month rough patch for stocks that began in mid-May and ran through early October, gold's value held steady as the stock market declined 26 percent. See chart.
However, gold's role as the market's polar opposite doesn't always play out. Andy Smith, precious metals analyst at Mitsui Global in London, tells me that in the 300 working days that followed Sept 10, 2001, the Dow Jones Industrial Average (INDU) has risen 137 days. On those days, the Philly Gold Index rose 59 days and the Amex Gold Bugs Index (HUI) of mining shares gained 57 days. Gold itself, as measured by the afternoon London fixing price, gained on 55 days.
"So about 40 percent of Wall Street up days since Sept 10, 2001, saw a rise in gold shares or bullion," says Smith, one of the most respected precious metal analysts.
James Turk, founder of electronic payments system Goldmoney.com and a longtime gold analyst and newsletter editor, sees the seeds of a lasting gold rally in the works.
"More important is gold's relationship to the dollar," Turk said Tuesday. "Normally a lower dollar means higher gold prices, which explains what is happening now. It also explains why the potential for gold looks so bullish here. The dollar is exceptionally weak."
Turk says the dollar index, an indicator of the greenback's performance against a basket of other currencies, dropped 14 percent from in January to July. He noted that the index has been unable to recoup more than a third of those losses. "That's worse than a dead-cat bounce in the dollar. It also portends a major new slide in the dollar. That is bullish for gold."
While suffering from a record U.S. trade deficit, the dollar's demise reflects a looming reduction in interest rates. The Federal Reserve's policy-makers will meet Wednesday to consider easing rates to shore up the nation's wavering economy.
Tuesday's U.S. elections are also a factor in the dollar's early November decline. Many races are too close to call. An evenly divided House and Senate could produce legislative gridlock. Gains by Republicans, who largely favor military action against Iraq, could add to the government's deficit spending.
Brien Lundin, editor of the 31-year-old Gold Newsletter, said Tuesday he expects gold's spot price to challenge the $325-an-ounce level soon. Lundin says gold gets help from concerns about the Israel-Palestinian conflict, the Russia-Chechnya struggle, a standoff between nuclear-armed India and Pakistan and "other hot spots" worldwide.
"You see that we are living in one of the more frightening periods since American gold ownership was legalized in 1974," says Lundin, who this week is staging the gold-related New Orleans Investment Conference.
At the heart of the pro-gold arguments is a belief that U.S. and international stock market investors have stepped into dangerous territory by sending equity indexes up 12 percent in the space of a month.
"Gold stocks are moving upwards because the dollar, which has in recent times moved consistently in tandem with the U.S. equity markets, failed to do so this time," says Frank Giustra, chairman of Endeavour Financial, a merchant bank that specializes in mining companies.
"Perhaps foreigners are starting to catch on that the current frenzy to buy stocks, like all the rallies since the bubble burst in 2000,will have the long-term appeal of a pet rock," Giustra told me Tuesday from his office in Canada.
Giustra says dollar investors, in their belief the U.S. economy can avoid a steep descent in the economy, have lived in a state of denial for several years.
"The dollar, until now, has held up against incredible odds, including record current account deficits, exploding budget deficits, a vicious bear market in stocks and an economy poised to double-dip," he said. "The dollar downward trend is very much in tact, and as history has shown, when the dollar falls, gold rises."
Barry Cooper, a gold equities analyst at CIBC World Markets in Toronto, says the relationship between gold and the dollar is usually one of opposites. "There is not always an inverse relationship although I would argue that lately the movements between bullion and the dollar have been very strongly correlated on the negative side," Cooper said Tuesday.
The spot price of gold Tuesday morning rose as high as $321.50 from a $317.50 low. The metal started the year at $278.70 an ounce. The euro was rising 0.5 percent against the dollar Tuesday to $1.0016. U.S. gold mining shares were little changed. See: Euro strikes parity with dollar. |
